Luxembourg’s new tax reform: a move to attract global talent 

Marianne recently completed her master’s degree in economics from Trinity College and is now seeking her first job. She plans to leave Dublin, her hometown, and move abroad for new experiences. Her parents aren’t thrilled about it, of course, but understand her thirst for adventure.  

She is considering moving to Luxembourg, where her childhood friend Claire relocated a year ago. Claire has been encouraging her to come, describing the positive aspects of the country: safety, excellent public services, and an efficient healthcare system. Social security protection and the pension regime in Luxembourg are also noted for being beneficial and affordable. 

But it’s not all sunshine and rainbows. Claire, always candid, warned Marianne about the high housing prices. On a rainy evening—typical for Dublin—Marianne investigated it herself. What she discovered was surprising: Ireland and Luxembourg shared more than just gloomy weather. If rent prices in her hometown hadn’t been equally high, she might have fallen right off her chair. 

While researching, Marianne also discovered a new tax reform in Luxembourg designed to enhance purchasing power, boost competitiveness, and attract top talent. ‘This is promising. It seems like the Luxembourgish government is making efforts to be more enticing,’ she thought. 

Still, Marianne felt conflicted, so Claire connected her with Alexandre, a personal tax specialist. During a videocall, the three of them discussed the tax reform, its context, and some of its measures. In this blog, we share their dialogue and our views on the draft law’s impact on attracting talent, including to our firm. 

Setting the scene for Luxembourg’s new tax reform 

‘Hey Alexandre and Claire! Thank you for taking the time to speak with me,’ begins Marianne. 

‘Hi Marianne, it’s nice to meet you! Please, call me Alex,’ replies Alexandre. ‘I understand that making the decision to move to a foreign country can be overwhelming, so I am more than happy to help you.’ 

‘This decision can indeed feel more challenging when it comes to Luxembourg,’ interjects Claire. ‘To be honest, the country’s competitiveness in terms of compensation has been declining compared to neighbouring countries. Previously, Luxembourg’s appealing compensation packages set it apart from other nations. However, flexibility for employees has become problematic due to tax and social security regulations, particularly affecting non-residents who are limited in their ability to work from home.’ 

‘Oh, that’s right, Claire. You told me that Luxembourg has a substantial number of cross-border workers from Belgium, France, and Germany, doesn’t it?’ inquires Marianne. 

‘Indeed, Marianne. The rising housing costs make it increasingly difficult for young people to settle in Luxembourg. Consequently, many people, though not all, choose to live across the border and commute daily to work here. In my view, and according to many others, this lack of affordable housing further diminishes Luxembourg’s appeal to new employees,’ explains Claire. 

‘This context certainly tempers my enthusiasm. Is Luxembourg’s new tax reform designed to address these issues in any way?’ asks Marianne. 

Alexandre takes over: ‘Certainly. The draft law, which was submitted on 17 July 2024 and is yet to be voted on, proposes measures for individual taxpayers and companies to strengthen the purchasing power of Luxembourg residents and cross-border employees, the competitiveness of Luxembourg and attract top talent.’ 

He elaborates: ‘As the Luxembourg Finance Minister Gilles Roth put it when unveiling details of the tax reform, this package includes a tax toolkit for employers to retain and attract skilled talent. He emphasised that these measures aim to create a dynamic environment to drive growth and open new opportunities for citizens and businesses, better preparing the country for the future’. 

‘Thanks for clarifying, Alex. Can you walk me through some of the measures?’ asks Marianne. 

‘Of course! The package includes 16 measures, but I’ll focus on those that impact attracting and retaining talent. Let’s start with the tax scale,’ says Alexandre.  

Adjusting the tax scale to counter inflation 

Alexandre begins explaining: ‘In recent years, inflation has surged globally, including in Luxembourg. The Grand Duchy uses a system where salaries are periodically adjusted based on inflation, which prompted the country to recently make some adjustments to its tax scales to partially account for these automatic salary increases.’  

‘However, not all inflation adjustments are reflected in the tax scales. Without these adjustments, salary increases driven by inflation lead to higher taxes, meaning people pay more without actually seeing a real increase in their financial well-being,’ he continues. 

‘I see —sort of. Could you share an example, please?’ asks Marianne, looking confused. 

‘Sure! If someone earning EUR 20,000 gets a raise to EUR 22,000, they would be taxed at 20% on the extra EUR 2,000. But this raise only reflects the higher cost of living, not an actual increase in wealth, yet it leads to higher taxes. Is it more clear now?’ replies Alexandre. 

‘Yes! This makes adjusting the tax scales essential to avoid what is effectively a hidden tax increase caused by inflation-driven salary indexation, correct?’ states Marianne proudly. 

‘You got it, Marianne! While some countries, such as France, automatically review and adjust tax scales annually to account for inflation, this isn’t standard practice in Luxembourg,’ says Alexandre. ‘To mitigate this, the personal income tax scale will be modified by adding 2.5 index brackets in 2025. This change builds on the previous neutralisation of four wage indexations, which took effect on 1 January 2024, resulting in a substantial reduction of the tax burden for all households.’ 

Alexandre continues: ‘Moreover, Luxembourg’s taxation system includes various tax classes based on family status and individual versus collective taxation. There is the intention to simplify this system into a single tax class, supplemented by mechanisms to account for dependents. The draft rule is expected to be presented by the government by 2026,’ he concludes. 

‘Oh, that could be enticing for those already in Luxembourg,’ says Marianne. ‘What about people like me, considering moving there?’ 

‘Well, there’s a new tax regime for impatriates—that is, highly qualified workers,’ Claire intervenes.  

Introducing the new impatriate tax regime 

‘Luxembourg’s government is aware that is becoming harder and harder to attract talent to the country, especially since we are in fierce competition with nations that have enticing regimes, such as France, Belgium, Netherlands and Italy,’ continues Claire.  

Alexandre adds: ‘Exactly. I believe Luxembourg’s attractiveness can be significantly enhanced by revamping the current impatriate tax regime, which is complex and involves various allowances with differing tax exemptions. Employers often find it difficult to navigate, leading to reluctance to use it.’ 

‘So, what’s changing?’ inquires Marianne. 

‘The current regime will be completely reshaped to allow highly skilled, experienced employees recruited abroad and relocating to Luxembourg, to benefit from an income tax exemption of 50% of their total gross annual remuneration. The amount of annual gross remuneration that can benefit from this exemption is capped at EUR 400,000. This means that for an annual compensation package of EUR 150,000, only EUR 75,000 would be taxable.’  

‘What do you make of this, Alex?’ asks Marianne, curious. 

‘In my view, Luxembourg’s new plan will be more beneficial, potentially attracting talented individuals to relocate. The proposed bill simplifies the process by eliminating the need for detailed allowance documentation while maintaining the same eligibility criteria. Annual reporting is still required, but employers can easily check conditions, document compliance, and apply the exemption,’ he explains. 

‘Summing up, it’s a valuable tool that offers generous benefits, making it easier for companies to provide competitive net salary packages without significantly increasing gross salaries, ultimately benefiting both employees and employers,’ he concludes. 

‘It’s a win-win situation, then. But what happens to impatriates who currently benefit from the regime?’ inquires Claire. 

‘That’s a good question, Claire. They simply remain under the former regime unless the application of the new regime is requested. The request is to be communicated to the Luxembourg tax authorities and is irrevocable from the tax year in which it’s made,’ responds Alexandre. 

‘Great, thanks for clearing that up. I think it’s time we move on to a measure that I’m sure will grab Marianne’s attention,’ Claire says with a knowing smile. 

‘Ah, do you mean the one aimed at attracting younger employees?’ Alex replies, a smirk playing on his lips as he catches on to Claire’s intended direction. 

Tax exemptions for bonuses paid to employees under 30 

‘Precisely!’ confirms Claire. ‘I read that, at the start of the tax year, employers could offer employees under 30 years old a bonus with a partial tax exemption based on their income.’ 

‘Exactly, Claire,’ Alexandre confirms. ‘Up to 75% of the bonus paid by employers can be tax-exempt, with limits between EUR 2,500 and EUR 5,000, depending on the employee’s salary,’ he explains. ‘For total compensation up to EUR 100,000, the maximum EUR 5,000 bonus would qualify for partial tax exemption, but this amount decreases as income rises. Once remuneration exceeds EUR 100,000, no exemption applies.’ 

‘Could you share an example again?’ requests Marianne. 

‘Bien sur! An employee under 30 years old with an income of EUR 50,000, including a bonus of EUR 5,000 gets a full tax exemption for EUR 3,750 of the bonus. With a total compensation of EUR 80,000 including a bonus of 5,000, the exemption is limited to EUR 1,875 EUR.’ 

Alexandre suddenly jumps, startling both Marianne and Claire. ‘Oh, I almost forgot to mention! This benefit is only available for your first job in Luxembourg. If you switch companies, the new employer won’t be able to offer the same tax-exempt bonus,’ he explains. ‘If you ask me, while not groundbreaking, this measure can aid in attracting and retaining young talent, especially those from abroad, as it intends to support young employees at the beginning of their career.’ 

‘Like me,’ concludes Marianne, a hint of realisation in her voice. 

Sharing the wealth: Enhancements to the profit-sharing scheme 

During their conversation, Alexandre also explains the profit-sharing system, which is for companies that have a positive net after-tax result: ‘With the new package, companies will be able to distribute profit-sharing premiums of up to 7.5% of the company’s previous year after-tax net result to employees, up from the current 5%. Additionally, the maximum amount has been raised from 25% to 30% of an employee’s annual gross fixed salary. The 50% tax exemption on the premium for employees remains unchanged.’ 

‘That all sounds grand,’ says Marianne, her brow furrowing. ‘But I think it’s time to address the elephant in the room.’  

‘Indeed,’ Alexandre agrees. ‘Let’s talk about housing prices.’ 

Tackling the housing crisis 

Alexandre takes a sip of water before addressing this topic: ‘Luxembourg has experienced housing market pressure in recent years. The primary reason is the imbalance between supply and demand. While demand remains strong, supply hasn’t kept pace, with building permits falling behind the rate of demographic growth.’ 

‘Actually—and sorry to interrupt you, Alex—there are two interesting blog entries from PwC Luxembourg about the subject: ‘Why are Luxembourg housing prices still on the rise?’ and ‘Surge in real estate supply in Luxembourg requires a sustainability-driven approach,’ reminds Claire. 

‘Oh, no problem, Claire. Thanks for mentioning it. In fact, measures have been adopted to counter the housing issue. However, they may have been too limited as evidenced by housing prices skyrocketing,’ says Alexandre. ‘Consequently, in May and June 2024, the government adopted several new measures as part of the Housing package of 31 January 2024, addressing key issues such as housing availability for people relocating to Luxembourg.’ 

‘Can you go into more detail, Alex? I’m really interested in knowing more,’ requests Marianne. 

‘Sure, Marianne. One significant measure concerns compensation: employers can now provide a housing allowance with a 25% tax exemption for employees under 30 years of age, capped at a maximum of EUR 1,000 per month. The exemption applies to the actual rent the employee pays, excluding charges,’ explains Alexandre. 

‘As an example, if an employee pays EUR 750 in rent and receives a EUR 1,000 allowance from their employer, the 25% tax exemption would apply only to EUR 750. This results in a reduction of the taxable basis, with the maximum tax rebate being EUR 250.’ 

He adds: ‘However, given that the top tax rate is close to 45%, the maximum potential tax savings for the employer amounts to approximately EUR 100 monthly. Considering the administrative tasks it requires, such as collecting rental agreements and processing payroll, my experience is that many employers find the benefit to be marginal and not worth the effort. Consequently, interest in this measure has been limited.’ 

‘From what you’re telling us, it doesn’t seem particularly advantageous for companies,’ Claire interjects. ‘I’ve read that neighbouring countries have implemented similar measures. For instance, in Belgium, there’s a compelling policy where individuals can receive an annual premium for living close to their workplace. Specifically, if someone lives within ten kilometres of their company, they qualify for a full exemption on their rent. In my opinion, this is a significant incentive. It encourages employees to find accommodation near their office instead of having to search further away.’ 

‘I’ve read about it too, and I agree with you, Claire,’ says Alexandre. ‘This tax-exempt premium can also be used to cover other expenses, such as buying an electric vehicle or paying for public transportation. Even though Luxembourg already offers free public transport, this kind of measure could be particularly beneficial for our cross-border workers.’ 

‘Very interesting! I believe this policy offers a comprehensive approach to supporting both sustainable and convenient living arrangements,’ Marianne declares. ‘Are there any other measures you’d like to highlight?’ 

‘Yes. For prospective homeowners, a new tax credit for registration duties has been introduced,’ Alexandre replies. ‘Currently, Luxembourg imposes a 7% registration fee on the acquisition price of a main residence. Recognising the high cost of purchasing property in Luxembourg, the tax credit for individuals has been increased from EUR 30,000 to EUR 40,000 for purchases made in 2024.’ 

‘That’s something!’ exclaims Marianne. 

‘Absolutely!’ agrees Alexandre. ‘Furthermore, the deduction of mortgage loan interest was increased earlier this year, with plans underway to potentially remove the limit altogether, allowing for the deduction of all interest paid in connection with a mortgage loan for a main residence during the year of acquisition and the following year. Subsequent years will see deductions capped incrementally at EUR 4,000, EUR 3,000, and EUR 2,000.’ 

‘What about property shortage in Luxembourg?’ Claire asks. ‘I know it’s worsened because of the crisis, leading to fewer construction projects and widening the gap between supply and demand.’ 

‘Good point, Claire. Actually, temporary reductions in registration duties for properties intended for rental markets have been introduced to address the construction issue and encourage investment in new buildings before they are built. This is called VEFA—Vente en l’état futur d’achèvement—by the way,’ explains Alexandre. 

He adds: ‘Additionally, enhanced depreciation rates for new constructions are available, making it more attractive to invest in these projects. For instance, under certain conditions, the depreciation rate for a property costing EUR 300,000 could be increased to 6%.’ 

‘These are positive efforts, but are they enough? What are your views, Alex and Claire?’ inquires Marianne. 

The tax reform’s ripple effect on Luxembourg’s attractiveness 

‘Whether these efforts will be enough remains uncertain, but it’s clear that more might need to be done,’ Claire acknowledges. ‘Still, the government’s attempt to tackle these issues and introduce incentives to attract people, while enhancing its image, signals a positive direction. These measures are certainly aimed at creating a more welcoming environment for businesses and talent.’ 

‘I completely agree, Claire,’ Alexandre adds. ‘Employers in Luxembourg can use these measures to offer more competitive compensation packages. Meanwhile, other countries, like the UK, are debating policies that take the opposite approach—such as increasing capital gains and carried interest taxation, or employer social charges. These policies generally involve raising taxes.’ 

‘I feel much more reassured about moving to Luxembourg,’ Marianne says with a warm smile. ‘As you mentioned, even if these measures aren’t groundbreaking, they are something and it’s clear the government is genuinely trying to improve the situation. Thank you both so much for taking the time to answer my questions and explain these initiatives!’ 

‘Happy to help!’ reply Alexandre and Claire in unison, before laughing. 

‘It was really nice talking to you, Marianne. I hope we can meet in person soon,’ Alexandre adds with a wink. 

Marianne chuckles. ‘Yes, I think that might happen sooner than you expect—and that’s largely thanks to your clarifications.’ 

‘I’m glad to hear that, Marianne. I have to go now, but if you have any other questions, don’t hesitate to reach out. I hope to speak soon!’ Alexandre says, waving goodbye before disconnecting from the video call. 

Promising to catch up soon, Claire and Marianne also end their call. 

Feeling inspired, Marianne revisits the open tabs she kept with promising job positions in Luxembourg that align with her skills and studies. While her future feels like a big question mark, she’s excited by the possibilities ahead. With new doors opening before her, it’s time to start applying. 

Our final thoughts  

Luxembourg has seen significant growth over the past few decades, creating a strong demand for a skilled workforce. On the surface, attracting top talent to the country should be easy. Employers offer competitive salaries, and the nation provides numerous opportunities for career advancement and professional growth—along with all the benefits we discussed at the beginning of our blog. However, when compared to other countries, Luxembourg’s salaries may not always stand out. 

But the challenges run deeper, with issues like housing and taxation continuing to present barriers. Despite these hurdles, the government’s proposed measures—an extension of last year’s inflation response—represent a positive step forward. Moreover, reforms are set to continue, with Luxembourg planning to introduce new measures next year, including broad-based tax reductions that will benefit not only newcomers but everyone in the workforce. 

As a firm facing the same recruitment challenges as many companies in the Grand Duchy, the tax reform and housing package offer us a vital opportunity to attract and retain young talent, as well as highly skilled workers from abroad with specialised expertise that’s difficult to find in Luxembourg or the Greater Region. These initiatives enable us to highlight Luxembourg’s advantages and reinforce its attractiveness to potential talent. 

The proposed tax simplifications and exemptions could prove pivotal, especially the partial tax exemption for bonuses paid to employees under 30, considering that the average age at PwC Luxembourg is just under 32. Certain measures, such as the revised profit-sharing scheme ceilings and the overhaul of the special tax regime, stand to benefit both incoming talent and those already contributing to Luxembourg’s economy. 

At PwC, we’ve always been committed to finding innovative ways to attract and retain talent, staying ahead of the curve when it comes to adapting to new measures and trends. We have already implemented several initiatives tailored to the needs of both current and future employees. For instance, our flexible working culture offers adaptable hours, remote work opportunities—including the possibility to work from abroad under certain conditions—and satellite offices near Luxembourg’s borders, all designed to reduce commuting times. 

As we look ahead, we will continue to explore how new government measures can enhance our efforts. Our internal working group keeps actively reviewing these developments to ensure we can adjust our policies as needed, allowing our employees to fully benefit from every available opportunity. By remaining responsive to these changes, we will stay competitive in attracting and retaining top talent in Luxembourg. 

What we think